How Credit Card Authorization Works

Definition: Credit card authorization is an approval from a card issuer, usually through a credit card processor, that the customer has sufficient funds to cover the cost of the transaction. It can also refer to the procedure of acquiring that authorization from the issuer.

How does online credit card authorization work?

Authorization is the first step when purchasing goods or services. The merchant sends a request to their acquirer, also called a credit card processor — PayPal, for example. The acquirer then submits a request to the credit card issuer.

The issuer reviews the customer's account and decides if enough funds exist to cover the cost of the sale. If they do, an authorization hold is made which reduces the customer's credit line for the amount of the sale. An authorization code is sent to the acquire, who responds to the merchant with a code for approval or error code. When an error code is issued, the transaction is incomplete.

Is money transferred during authorization?

In online payments, the actual money transaction is handled by a process called "Capturing." Authorization is the acknowledgement of available funds, and it places a hold on those funds. In many cases with online acquirers, the capturing phase is usually accomplished automatically after the authorization.

How can authorizations fail?

Authorizations can fail for technical or financial reasons. Buyers are notified of failures automatically by most online processors. The cause of an authorization failure is identified by its error code. Error codes will differ based on acquirer. The most important point is that a failed authorization means a sale can not be completed. The seller should not ship the product or complete the transaction without an authorization code.

If the error code indicates a technical problem then it is usually the seller's job to fix the issue. In rare cases, the acquirer will be having technical issues and the seller will have to wait until these are fixed. In most cases, there is a problem with the information being supplied to the processor. This can be an issue with the configuration or the online submission, such as an incorrectly typed or missing value. In this case, the seller should fix the problem as soon as possible. Error codes indicating financial reasons usually mean there is a problem with the buyer's account.